The Fed's Preferred Inflation Gauge Cooled in June. It Might Not Last.

 

The Fed's Preferred Inflation Gauge Cooled in June. It Might Not Last.

**The PCE index fell for the first time in years, driven by a temporary pause in the Iran war. But with fighting resuming and oil prices surging again, the relief may be short-lived, and the Federal Reserve is already signaling it won't change course based on one good print.**

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## A Glimmer of Hope, Quickly Overtaken by Events

For a brief moment in June, it looked like the inflation fight was finally turning a corner. The Federal Reserve's preferred inflation gauge—the Personal Consumption Expenditures (PCE) price index—cooled significantly, with overall consumer prices even falling slightly from the previous month .

The numbers were welcome: headline PCE dropped to a 3.7% annual rate, down from 4.1% in May, while core PCE—which excludes volatile food and energy prices—edged down to 3.3% . On a monthly basis, core PCE rose just 0.1%, below economists' expectations .

The primary driver was energy. During a brief pause in the U.S.-Iran war in mid-June, oil prices tumbled back toward their prewar levels, providing relief at the pump . As Nic Puckrin, macro analyst at Coin Bureau, put it: "After relentlessly rising for months, the Fed's preferred inflation gauge finally cooled in June as oil prices eased. That's a glimmer of hope for households that have been crushed by mounting cost-of-living pressures, but it won't be enough to sway the Fed" .

But the hope was short-lived. The ceasefire collapsed, fighting resumed, and oil prices surged again—a reminder of how fragile the improvement was .

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## What the June Data Actually Showed

The June PCE report, released Thursday, was a rare piece of good news in a prolonged inflation fight. The Commerce Department reported that overall consumer prices fell 0.1 percent from May, the first monthly decline in six years . The annual rate of 3.7 percent, while still well above the Fed's 2 percent target, was a significant drop from the three-year high of 4.1 percent recorded in May .

On a core basis, the picture was more mixed. Core PCE rose 0.1% month-over-month and 3.3% year-over-year, roughly in line with May's annual increase . The monthly core reading of 0.1% is significant because New York Fed President John Williams had said earlier in the month that readings of 0.2% or lower would indicate inflation is dropping toward the Fed's 2% target .

But the data came with a major asterisk. It captured a period *before* the war with Iran escalated again after the brief pause in June . During that temporary respite, oil prices fell sharply, helping keep a lid on overall inflation for the month. But they climbed again as strikes resumed in July .

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## Why It Might Not Last: The Iran War and the Oil Shock

The resumption of fighting in the Middle East is the single biggest threat to the June progress. As the New York Times reported, the PCE data "captures a period before the war with Iran escalated again after a brief pause" . The longer the conflict drags on, the more upward pressure it will put on inflation, which has overshot the Fed's 2% target for more than five years .

Oil prices, which had fallen toward prewar levels in June, surged again in July. The fighting has threatened the Strait of Hormuz, a critical chokepoint through which roughly one-fifth of the world's oil passes. As a result, the national average for gasoline has climbed back above $4 a gallon, reversing much of the relief consumers felt in June.

On top of this, core PCE remains well above target, and tariffs continue to add to price pressures . As Puckrin noted: "On top of this, core PCE remains well above target. This print gives the doves some ammunition for September's meeting, but don't mistake it for a victory over the hawks" .

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## The Fed's Response: One Good Print Won't Change the Course

The June PCE data was released one day after a deeply divided Federal Reserve voted 9-3 to hold interest rates steady at 3.50% to 3.75% . Three regional presidents—Beth Hammack of Cleveland, Neel Kashkari of Minneapolis, and Lorie Logan of Dallas—dissented, preferring a quarter-point rate hike .

The dissent signaled a growing impatience within the Fed to act on inflation that has been above target for more than five years . The decision to hold rates steady was the fifth consecutive meeting without a change .

In his press conference, Chairman Kevin Warsh said the cooler June inflation data did not factor much into the Fed's decision to stand pat . He reiterated his commitment to achieving the Fed's 2% target, but his hesitancy to embrace the possibility of higher rates sparked a backlash in bond markets .

As Puckrin put it: "Yesterday, chair Kevin Warsh made it clear that one good print won't change the trajectory of monetary policy. Plus, three of his colleagues voted to raise rates. It will take a sustained move lower to convince policymakers that inflation is under control" .

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## What Comes Next: September, Jackson Hole, and the Data Watch

The Fed's next meeting is in mid-September. By then, officials will have two more months of inflation data . If inflation does not show further signs of cooling, most officials have suggested they will need to tighten policy . After Wednesday's press conference, traders put roughly a 57% chance on a September rate hike .

Warsh will also have a chance to offer more clarity at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, in August . In the meantime, the dissenters will speak publicly starting Friday, and their views could shift the committee's consensus .

As Puckrin summarized: "This print gives the doves some ammunition for September's meeting, but don't mistake it for a victory over the hawks" .

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## Frequently Asked Questions

### Q: What is the PCE price index?

The Personal Consumption Expenditures (PCE) price index is the Federal Reserve's preferred measure of inflation. It tracks changes in the prices of goods and services purchased by consumers and is seen as a more comprehensive gauge than the Consumer Price Index because it accounts for changes in consumer behavior.

### Q: How much did PCE inflation cool in June?

Headline PCE fell 0.1% from May and rose 3.7% year-over-year, down from 4.1% in May. Core PCE, which excludes food and energy, rose 0.1% month-over-month and 3.3% year-over-year .

### Q: Why did inflation cool in June?

The cooling was largely driven by falling energy prices during a brief pause in the U.S.-Iran war. Oil prices tumbled, lowering gasoline prices and pulling down overall inflation .

### Q: Is the inflation relief expected to last?

Probably not. The ceasefire collapsed, fighting resumed, and oil prices surged again in July. The longer the Iran conflict drags on, the more upward pressure it will put on inflation .

### Q: How did the Fed respond to the June PCE data?

The Fed held rates steady at its July meeting, but three officials dissented in favor of a hike. Chairman Kevin Warsh said one good print wouldn't change the Fed's trajectory .

### Q: What is the chance of a September rate hike?

After Wednesday's Fed meeting, traders put roughly a 57% chance on a September rate hike, according to CME FedWatch .

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